Topsy turvy tax rates

There’s loads of different taxes out there to sting you whatever you choose to do…but for the purpose of this blog I’m just looking at personal taxes.

In my opinion, these are completely at odds with what they should be. This is regardless of whether you look at it from a perspective of fairness, or what we as a country should want to encourage.

Below is a table of how much tax you’d pay if you only had one type of income, being taxed by the method selected. For this purpose I’m including NICs and assuming that the CGT qualifies for entrepreneurs relief, using 2012/13 tax rates/thresholds).

[table]

,£30k earnings,effective %,£150k earnings,effective %

Salary,£6.782,22.6%,£59.813,39.9%

Rental/bank interest,£4.112,13.7%,£53.598,35.7%

Dividends,£0,0%,£31.965,21.3%

Capital gains,£1.910,6.4%,£13.910,9.3%

Inheritance,£0,0%,£0,0%

[/table]

So as you can see, getting that much money as a salary means you pay the most tax. A bit less if it’s from property rental/bank interest (mainly due to lack of NICs). Less still for dividends (some will rightly argue corporation tax will have already been paid on these), then capital gains, then finally inheritance (again the dead individual would likely have paid tax when they generated the wealth).

It strikes me that there’s not far off an inverse correlation between how much hard graft you have to put in to get the cash taxed in that manner, with the effective tax rate paid. Ok so bank interest is fairly high up the list tax-wise and involves no/negligible effort…but nobody’s getting rich from bank interest these days!

So, why is it this way?

Cynics would say that those in power tend to come from wealthy families (and/or are heavily lobbied by wealthy families), so they’re keen on keeping inheritance and investment income taxed at a lower rate.

I think the main argument for it being this way is due to ease of collection/difficulty to avoid. PAYE does a great job of taking cash off employees before they get it…plus employees can’t offset many costs against their income, nor do they find it easy to move overseas to avoid UK tax. Also the majority of the population work for a living…relatively speaking very few get significant amounts of the other forms of income.

However, ease of collection is a questionable reason from a moral standpoint. “Like taking candy from a baby” doesn’t mean you should take as much candy as you can from babies.

I’m aware I can’t get on my high horse about this, where we can we try to help clients move most their earnings away from salary and into lower taxed forms. I guess my response to that would be “blame the game, not the playa”…and perhaps also “papa’s gotta eat”.